Why secretary of State permits pipelines – and other anachronisms

A patchwork of federal agencies oversees permits for various energy projects: from LNG exports to cross-state pipelines. Keystone XL pipeline decision hinges on Secretary of State, which has little experience with business permits.

One of the hottest topics in Washington this year will be how to export energy, whether LNG, crude oil, or refined products.

The most near-term decision point will be LNG exports. Ultimately, those export permits are likely to be allowed.

However, one of the strangest things is the many different agencies with sometimes overlapping authorities that oversee and permit construction. Many of these are simply an anachronism stemming from the time when Congress first passed the law. The Secretary of Energy, for example, has oversight over LNG exports because the 1938 Gas Act gave it to the Federal Power Commission – which was folded into the Department of Energy when that was created in 1979.

If you want to export crude oil, you need a permit from the Bureau of Industry and Security (BIS), a branch of the U.S. Commerce Department which handles export controls. However, if you want to export crude oil from Alaska's North Slope, then "such oil may be exported unless the President finds that exportation of this oil is not in the national interest." This decision was made in 1995, when low domestic oil prices were pushing Alaska to privatize its power administration and seek greater returns on its oil production.

Within the US, the Federal Energy Regulatory Commission (FERC) has the authority to permit interstate pipelines.

I still haven't been able to figure out why the Secretary of State has the authority to permit cross-border pipelines. As we know, that process was politicized last year, leading to a blockage of the Keystone XL pipeline.

If all of this sounds needlessly complicated, that is because it is. Of these, FERC is widely agreed to be the most business friendly, with the smoothest and most professional process. The BIS, which is in charge of permitting for exports of crude oil, is not an agency that is very familiar with the energy industry, though it has a reputation for working fairly well with businesses through its role in permitting exports of high technology, potential 'dual-use' goods.

One of the big lessons from the permits of LNG exports is that the Department of Energy is pretty much flying blind on this. The report on the impact of LNG exports on the US economy was delayed for almost a full year, and then it was released with little fanfare. Now, several months later, there is still no decision.

Finally, the State Department is the real wild card here. They simply do not work with business on permitting very much. Keystone XL's permit was held up for almost 3 years before it even became a major cause which the environmental movement rallied around. Perhaps a more efficient agency, with experience in permitting large infrastructure projects, would have allowed the pipeline to move forward earlier.

The lesson for investors is to be aware of the culture and history of the agency you need to get your permit from. Some are very different than others, and the outcomes can be unpredictable if you're unaware of this. 

– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.